Global capitalism at most perilous since 1930s

By Robin Clapp, Socialist Party England and Wales national committee member

For over a year, the Covid-19 pandemic has wreaked havoc across the globe, causing over two million deaths and unleashing enormous economic and social crises. 2021 has ushered in new lockdowns in the UK, Germany and many other countries, while from California to Tokyo the as-yet-unconquered and mutating virus continues to surge.

The World Bank predicts global GDP (total output) will have shrunk by 5.2% during 2020, twice as deep a decline as in the 2007-09 ‘Great Recession’. This marks the biggest global economic contraction since 1945.

Developing countries face a debt tsunami as the World Bank estimates that African government revenues have collapsed between 12% and 16% since March. Zambia has become the first of several countries in that continent likely to default on its debt.

Last May, Unicef warned that if global income per head fell by 20%, which appears probable, the number of extremely poor people in developing countries could increase by 420 million, wiping out a decade of gains in the fight against poverty.

While the Covid-19 crash is on-track to rank as the fourth-worst global recession out of 14 in the past 150 years, it has nevertheless only been the catalyst for exposing deep latent structural imbalances within capitalism.

A new synchronised economic slowdown was already highly probable last year, little more than a decade after the soothsayers of capitalism sought to assure us that the 2007 financial crash and the recession that followed were ‘once-in-a-generation’ events.

In this era, capitalism is not able to play even a relatively progressive role in advancing the needs of humankind and indeed the planet itself. Increasingly sclerotic, it can neither take full advantage of the marvels of artificial intelligence nor implement multilateral action programmes that can effectively begin counteracting climate change.

Where new technologies are taken up, they lead inexorably not to new job creation, but unemployment, chronic under-employment or zero-hour jobs that pay minimum wages or less.

The US under President-elect Biden will re-enter the Paris Climate Change Accords, but little beyond hot air will result. The last two years have shown the dangers of ignoring the steady rise in extreme weather events. Yet competing capitalist nation-states will continue to evade responsibility for dealing with this crisis.

Heavily dependent upon speculative ‘fictitious capital’, most of it debt-fuelled, the centre of gravity of western economies, especially the US and the UK, has shifted from real production towards what often resemble gigantic financial Ponzi schemes (fraudulent investment scams).

The last year has once again highlighted that capitalism is a barrier to human progress. Privatisation of health provision and the greed of the market have combined to undermine effective medical responses to the pandemic.

The urgent historical task for the working class now is to step up the building of new mass parties and revolutionary parties of workers and youth, equipped with socialist programmes, and to transform the trade unions into combative fighting organisations. Only socialism offers a way out of the spiralling crises created by the profit system.

Some of the serious strategists of capitalism had an inkling of the underlying precariousness of their system. A system resting increasingly upon debt and propped up since 2008 by more than a decade of ultra-low interest rates and trillions of dollars from government quantitative easing programmes.

Inequality

Kristalina Georgieva, head of the International Monetary Fund, warned in January 2020 that unprecedented levels of wage and social inequality and financial sector instability were eating away at the vitals of the system.

She compared the current economy to the ‘roaring 1920s’ that culminated in the great stock market crash of 1929. She added that fresh issues, such as climate change and increased trade tensions, meant the next ten years were likely to be characterised by social unrest and financial market volatility. Georgieva concluded: “If I had to identify a theme at the outset of the new decade, it would be increasing uncertainty.”

Challenges abound for capitalism in this era. Geopolitical and economic rivalries with China mean that the US is no longer able to assume the role of a unipolar superpower.

Biden’s victory in the US Presidential election and any subsequent stimulus programmes that the administration unveils will not become locomotives for world recovery, as was the case after 1945.

This reflects the US’s relatively weakened position in a world where China’s emergence as a competing economic and political superpower has begun to decisively change the balance of international relations. At the same time, the US is compelled to pursue its “America First” approach in order to try and reverse the dangerous economic and social malaise into which it has sunk.

Biden has scotched the idea of a comprehensive return to untrammelled tariff-free trade. While his remarks are aimed at his domestic electorate, they contained barely disguised warnings to China’s regime too.

China and the USA

All sections of the US capitalist class are obsessed by the threat China poses to its economic, strategic and geopolitical interests. By 2022, according to forecasts by the Organisation for Economic Cooperation and Development, the US’s economy will be the same size as in 2019, but China’s will be 10% larger.

This has placed great strain on the unfettered globalisation model beloved of right-wing neoliberal governments, which since 2009 has begun to stutter and even partially reverse.

The pandemic will mark a turning point in politics and geopolitics, as well as economics. The world will emerge from 2020 into an era of even more intense great-power competition.

A survey conducted by the McKinsey Institute think-tank in May, last year, found that 93% of firms were looking to make supply chains more resilient. These companies are worried not just about trade wars and other shocks, but about their environmental footprint and labour standards. These are easier to monitor closer to home.

The emergence of unstable right-wing populist governments in India, Turkey, Brazil and elsewhere are all expressions of the new volatile period that is opening up. This is characterised, above all, in the US, where Trump’s capitalist regime has trampled over multilateral institutions like the United Nations, EU, Nato, and even the World Health Organisation.

Biden’s administration will face arguably the biggest set of challenges a president has had to tackle since 1945.

Bailouts

Ditching neoliberal orthodoxy, the US government, as elsewhere, has been compelled because of the pandemic to bail out ailing companies – ‘zombie capitalism’ – and the banking and financial networks, with huge aid packages.

These have been designed with workers’ interests at the very bottom of the priority list, and are primarily driven by the urgent need to stabilise the system. Currently, the Federal Reserve and US Treasury are backstopping 11% of the US’s entire stock of business debt.

Central banks first began to take on the task of creating money via quantitative easing, to buy up sovereign and company debt, in 2008. In the last year, this has been resorted too again with a vengeance – except this time using a calculator that appears never to run out of noughts!

Nearly a fifth of all the dollars in existence have been created this year. Central bank balance sheets in the US, Britain, Japan and the Eurozone have risen by more than 20% of their combined GDPs since the crisis began, mostly to buy government debt. This is politically necessary now to steady the ship, but tomorrow the capitalists will look to claw back these dizzying expenditures through a sharp turn to austerity.

While the lockdown has been disastrous for some sectors, notably hospitality and airlines, people stuck at home have been spending more time online, shopping, watching, and working.

Hi-tech stocks

This has been good news for the big Silicon Valley tech giants such as Apple, Amazon, Facebook, Google, and Netflix, who have made huge profits in the past few months as the world has accelerated its shift online. Amazon chief, Jeff Bezos, has had an excellent pandemic, becoming the first person in history to be worth $200 billion.

At the other end of the scale, data from Harvard University reveals that in August there were 2% fewer jobs in the US paying more than $60,000 a year than in January. But jobs paying under $27,000 were 16% scarcer.

The Federal Reserve expects unemployment will not return to its pre-pandemic rate of 4% until 2023. Analysts at Goldman Sachs think it will do so only in 2025 while remaining naively optimistic that the roll-out of the vaccination programme will go smoothly with 40% of Americans receiving their jab by March.

The US economy collapsed by a revised annual rate of 31.4% between April and June, its sharpest contraction since 1945. Despite a 7.4% recovery from the spring lockdown, official GDP figures for the third quarter showed the size of the economy was still almost 4% below its previous peak.

The US’s economic bounce-back in the summer quarter was wholly because of the eye-watering scale of the stimulus packages agreed by Congress in the spring, worth 14% of GDP.

Biden now intends to implement an ‘Emergency Action Plan’ to save the economy. Using wartime legislation known as the Defence Production Act, he will compel US businesses to make personal protective equipment, medical supplies, ventilators and whatever else the US needs to tackle the pandemic.

While the UK is likely to enter a double-dip recession, stock markets across the developed world appear to be surging in an opposite direction. Between the start of April and the end of August, global stockmarkets rose by 37%, fuelled by rising technology shares.

The chief investment officer at UBS Global says the rally on Wall Street and the fall in the US dollar are “being driven primarily by central bank policies of adding unprecedented liquidity to markets through renewed quantitative easing and ultra-low rates.”

The reason for this apparent gravity-defying bounce is simple – stock markets are largely detached from the real economy, particularly in the UK, and no longer principally provide capital for productive investment.

Interest rates for savers are barely above zero. In some countries, the interest rates (yields) on government bonds have turned negative, which means investors have to pay the state for the privilege of putting their money in a safe asset.

For investors who believe shares are overvalued, there is gold or bitcoin – which has soared to over £25,000 per unit in the last period as speculators seek paper profits, albeit at very high risk.

After the 1929 Wall Street crash there was no major speculative bubble for 50 years, but since 1990 there has been one on average every six years. The global economy resembles a giant tinderbox, susceptible to any passing spark.

Veteran financier Jeremy Grantham, who foresaw the crash in 2007, warns: “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the [1720] South Sea Bubble, 1929, and 2000.”

Individually, any one of these issues – a global economy that is struggling with historically low productivity rates, financial markets divorced from reality, geopolitical tensions, a retreat from multilateralism, irresolvable debt crises, widening inequality levels, and over-heating planet – would be a challenge. Together they represent the most dangerous conjuncture since the 1930s.

Analysing the causes of the Great Depression, the Russian revolutionary socialist, Leon Trotsky, wrote in 1932: “The present economic crisis is an indubitable expression of the fact that world capitalism has outlived itself as a system… even though the automatic working of the laws of the market may lead to a softening of the crisis after a year or two, it will return again in a comparatively short time with redoubled force… the ruling classes will cure the crisis with a further economic decimation of Europe and a strengthening of protectionism and militarism.”

This analysis applies today with equal force. Capitalism offers only more poverty, wars, disease and racism, all of which are its natural excrescences.

Only the working class possesses the ability to rid the planet of these threats. To do that, we have to build mighty socialist forces to transform and create a 21st century worthy of the name.